US Treasury changing its tune as it eyes buying bank stakes

Finally US Treasury Secretary Henry Paulson appears to be listening to the critics of his earlier US$700 billion bailout plan to buy toxic bonds from banks. The New York Times is now reporting that US Treasury officials are now considering using the US$700 billion to inject capital directly into banks in the form of preferred shares, taking ownership of banks. Economists and many other critics have argued all along that direct injection rather than buying toxic and illiquid bonds from banks would be a much more effective form of recapitalisation. "Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials," the New York Times reported here. "Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks' balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones," the newspaper reported. The plan is similar to the one announced overnight by Britain's government, which is also fighting to restore confidence in a frozen banking system.